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# Chapter9 International Finance Management

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International Finance Management

International Finance Management

Published in: Economy & Finance, Business
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• 1. CHAPTER 9 MANAGEMENT OF ECONOMIC EXPOSURE SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMSQUESTIONS1. How would you define economic exposure to exchange risk?Answer: Economic exposure can be defined as the possibility that the firm&#x2019;s cash flows and thus itsmarket value may be affected by the unexpected exchange rate changes.2. Explain the following statement: &#x201C;Exposure is the regression coefficient.&#x201D;Answer: Exposure to currency risk can be appropriately measured by the sensitivity of the firm&#x2019;s futurecash flows and the market value to random changes in exchange rates. Statistically, this sensitivity can beestimated by the regression coefficient. Thus, exposure can be said to be the regression coefficient.3. Suppose that your company has an equity position in a French firm. Discuss the condition under whichthe dollar/franc exchange rate uncertainty does not constitute exchange exposure for your company.Answer: Mere changes in exchange rates do not necessarily constitute currency exposure. If the Frenchfranc value of the equity moves in the opposite direction as much as the dollar value of the franc changes,then the dollar value of the equity position will be insensitive to exchange rate movements. As a result,your company will not be exposed to currency risk.4. Explain the competitive and conversion effects of exchange rate changes on the firm&#x2019;s operating cashflow.
• 2. Answer: The competitive effect: exchange rate changes may affect operating cash flows by altering thefirm&#x2019;s competitive position.The conversion effect: A given operating cash flows in terms of a foreign currency will be converted intohigher or lower dollar (home currency)amounts as the exchange rate changes.5. Discuss the determinants of operating exposure.Answer: The main determinants of a firm&#x2019;s operating exposure are (1) the structure of the markets inwhich the firm sources its inputs, such as labor and materials, and sells its products, and (2) the firm&#x2019;sability to mitigate the effect of exchange rate changes by adjusting its markets, product mix, and sourcing.6. Discuss the implications of purchasing power parity for operating exposure.Answer: If the exchange rate changes are matched by the inflation rate differential between countries,firms&#x2019; competitive positions will not be altered by exchange rate changes. Firms are not subject tooperating exposure.7. General Motors exports cars to Spain but the strong dollar against the peseta hurts sales of GM cars inSpain. In the Spanish market, GM faces competition from the Italian and French car makers, such as Fiatand Renault, whose currencies remain stable relative to the peseta. What kind of measures would yourecommend so that GM can maintain its market share in Spain.Answer: Possible measures that GM can take include: (1) diversify the market; try to market the cars notjust in Spain and other European countries but also in, say, Asia; (2) locate production facilities in Spainand source inputs locally; (3) locate production facilities, say, in Mexico where production costs are lowand export to Spain from Mexico.8. What are the advantages and disadvantages of financial hedging of the firm&#x2019;s operating exposure vis-&#xE0;-vis operational hedges (such as relocating manufacturing site)?